BP’s Hayward Revives Explorer by Cutting Costs, Boosting Output

BLOOMBERG.COM

By Stephen Cunningham and Eduard Gismatullin

Oct. 28 (Bloomberg) — More than two years after taking over at BP Plc, Chief Executive Officer Tony Hayward is turning around Europe’s second-biggest oil company and beating its own cost-savings target by $1 billion.

BP, which celebrated its centenary this year, has posted earnings that exceeded analyst estimates for the past three quarters. That’s at a time when the oil industry has been roiled by volatility in crude prices as the deepest recession for half a century eroded demand for fuels to run factories and cars. It also sets the bar for Exxon Mobil Corp. and Royal Dutch Shell Plc before they release earnings tomorrow.

“Under Tony Hayward, the company is on the right track, they are doing everything right,” said Fadel Gheit, director of oil and gas research at Oppenheimer & Co. in New York. “He is cutting costs faster than any other CEO,” at the same time as raising production.

BP reported third-quarter earnings excluding one-time items and inventory changes of $4.67 billion yesterday, beating the $3.25 billion median estimate of 11 analysts compiled by Bloomberg. It’s already reversed two years of falling output after ramping up production in the Gulf of Mexico.

The odds were stacked against Hayward, 52, when he took over as CEO in May 2007. The company’s reputation had taken a battering from setbacks including a Texas refinery blast in March 2005 that killed 15 workers and oil leaks from corroded pipelines in Alaska.

Controversy

Hayward’s ascent to the top came as his predecessor, John Browne, resigned after losing a court battle to suppress a newspaper story about a relationship. Hayward, who had been scheduled to replace him later that year, took over with immediate effect.

He first acted to streamline BP’s operations by cutting headcount and merging the company’s gas and power unit with its main exploration and refining units. Hayward said in May he expected the cuts to exceed an original target of 5,000 by the middle of this year.

BP’s Texas City refinery has since returned to full service and the company is the largest producer in the Gulf of Mexico after increasing output at the delayed Thunder Horse platform to more than 300,000 barrels of oil equivalent a day. It forecasts annual output growth of between 1 percent and 2 percent until 2013.

BP expects cash costs to be around $4 billion lower in 2009, compared with an initial forecast of $2 billion and July’s revised target of $3 billion. Cost cutting also includes savings from cheaper fuel as well as currency fluctuations.

Cost Savings

“Hayward has really got in there and just taken what was a huge business and really started cutting costs aggressively,” said Andy Brough, a director at Schroder Investment Management in London. “And the cost cuts are ahead of expectations.”

Shell’s Peter Voser is now taking similar steps to those at BP, cutting spending and jobs. Voser has also announced plans to consolidate three units into two, focused on the Americas and the rest of the world, after taking over from Jeroen van der Veer at Europe’s largest oil company earlier this year.

Shell’s quarterly earnings, to be reported tomorrow, may have declined to $2.5 billion from $8.04 billion, according to analysts surveyed by Bloomberg.

Hayward’s reshaping of BP hasn’t hindered the company’s hunt for new oil and gas deposits.

In September, BP announced an oil discovery at the Tiber Prospect in the Gulf of Mexico which may contain more than 3 billion barrels, after drilling the world’s deepest exploration well. Hayward plans to boost output in the region by 50 percent to 600,000 barrels of oil equivalent a day after 2020.

Tiber Discovery

“What he has done effectively is streamline the operations, generate a lot more cash and a lot more profits, which enables him to not only maintain the dividend, but he can then afford to actually go out and spend a lot of money finding oil,” said Brough.

Some analysts caution that BP has already cut costs as much as it can, and there are a lack of new projects going forward.

“Without wishing to appear churlish on the back of such a strong quarterly performance, looking beyond the third quarter, we observe that the operational turnaround, which commenced in late-2007 has been largely delivered,” said Mark Bloomfield, a London-based analyst at Citigroup Inc.

Still, BP is up 13 percent in London trading this year, helped by yesterday’s 4.8 percent rally, while Shell is up 7.1 percent.

To contact the reporter on this story: Eduard Gismatullin in London at [email protected]

Last Updated: October 27, 2009 20:00 EDT

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